By Tiernan Ray

Microsoft Tuesday unveiled the Surface Pro 3, the latest of its tablet computers, with more powerful Intel “Core” processors, a thinner, lighter frame, and a larger 12-inch display.

Ink is barely dry on the headlines, but the Street is ready to comment on Microsoft‘s (MSFT) unveiling today of the latest model of its Surface tablet computer, the 12-inch Surface Pro 3, which is thinner and lighter than the existing model but has a larger screen and a more powerful processor, among other things.

The event did not produce what had been rumored would be a smaller version of the device.

First out of the chute this afternoon, and doubtless not last, is FBR & Co.‘s Daniel Ives, who has a Market Perform rating on the stock. He was at the event and writes that “the ‘new and improved’ Surface Pro 3 could enable Microsoft to throw “its flat brim hat in the ring” and grab greater market/mind share in the all-important tablet space given its laptop replacement positioning, which we applaud as it gives Microsoft a more unique selling feature than being another ‘me too’ tablet product.”

Ives thinks Surface Pro 3 is a “step in the right direction,” aligning with Microsoft’s cloud computing strategy, but the company has a tough battle to make headway against Apple (AAPL) and Samsung Electronics‘s (005930KS) tablet lead:

Strategically speaking, the company’s (and Nadella’s) game plan relating to the hardware business appears to be fitting its hardware with the core cloud/mobile strategy, as we believe Microsoft’s new tablets will make an attempt to further proliferate Microsoft’s strong cloud offerings (e.g., Office 365) which remain a key ingredient to the company’s recipe for success in coming years, in our view. With that said, despite rolling out this Surface refresh (pre-orders start tomorrow), we continue to believe Microsoft faces an uphill battle versus the likes of Samsung and Apple, as the company has been late to the game on the tablet front, and Surface’s impact has been underwhelming thus far. Overall, we believe this morning’s event was another step in the right direction in the Nadella era, and that his strategy for improved transparency, and strategic focus on the cloud continues to resonate well with investors. With that said, while Surface Pro 3 appears to be an impressive offering it all comes down to customer adoption, which we be believe remains a Kilimanjaro-like challenge given intense competition. We maintain our Market Perform rating.

Microsoft shares are down 17 cents, or 0.4%, at $39.58, following the event.

Update: BernsteinResearch‘s Mark Moerdler has filed his critique, reiterating an Outperform rating on the stock, and a $49 price target, and asking “But will it drive adoption?”

He’s not sure on that score:

Management explained that the Surface Pro 3 is designed to generate Apple level margins once it reaches scale. We understand that Microsoft had manufactured too many Surface tablets which needed to be written down / written off and that Microsoft is more careful with production of the Surface Pro 3. We estimate that Microsoft will need to sell 5M+ Surface tablets to hit production scale and 10M to hit ecosystem scale. The question is whether the Surface Pro 3 will be attractive enough, at these price points, to hit those numbers.

Other observations:

We note that Microsoft included within its announcements that BMW Group, the Coca-Cola Company, and LVMH (Moet Hennessy Louis Vuitton) have already committed to purchasing and deploying the Surface Pro 3 [...] Microsoft announced apps (e.g. Final Draft) that are designed specifically for the Surface 3 but will work well on other Microsoft Windows 8 touch devices. This level of customization in the app ecosystem, if it becomes more tightly tied to the Surface, could create friction with the OEM ecosystem [...] We believe that a combination of last year’s business re-organization and the different management styles of Nadella and Hood are driving Microsoft’s product teams to think more collaboratively and big picture. This should allow Microsoft to leverage different technology and products from what had been different parts of the organizations to improve Microsoft’s offerings. We also understand that the company, driven especially by Amy Hood, is driving aggressively to leverage the re-organization to make the company more efficient.

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There are 4 comments

MAY 20, 2014 12:56 P.M.

Doug wrote:

With a 1T SSD it might look interesting.

MAY 20, 2014 2:03 P.M.

Nick wrote:

i think they got it right this time, finally

MAY 20, 2014 2:15 P.M.

Anonymous wrote:

this is clearly aimed at business customers. it has a price tag of 800 (i3) all the way up to $1900 for an i7. if I can buy a mac air for $900 why the hell would i want a big tablet with a flimsy keyboard?
and they just gave away the low end consumer markets to ipad and android.
this is Surface Pro 2 REV 2

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.